Hindustan in Lever: Why MNCs shouldn’t delist

The news that Unilever plans to raise its stake in Hindustan Unilever (HUL) to 75% has produced a near-consensus view that HUL is working towards delisting and that it makes sense for MNCs to go that way. The arguments in favour of delisting are: complete control of the company, no Sebi scrutiny and no quarterly accountability to Indian shareholders, a free hand in transferring profits/dividends, and the immediate benefit of a spike in share price.

But there is a compelling opposite argument. I am all for MNCs hiking stakes as this brings in foreign investment and increases their commitment to India. However, I do not support delisting. Over the last eight months, while domestic investors — with their excessive focus on corruption — have sold Indian shares, foreign investors have bought in a steady, sustained manner. In fact, amongst foreign investors, a specific subset — strategic investors from the MNC community — have been even more bullish.

Four MNCs — Diageo, Etihad, GSK Consumer and HUL — have committed nearly $9 billion to buying minority stakes or expanding their majority stakes. So, why are these foreign companies so positive on India and will they remain bullish? Or will these MNCs take their listed Indian targets private? I feel it doesn't make sense for them to go for the latter option. The optimism with which MNCs, especially in the B2C space, view India arises from several sources.

Beyond rising wages and government dole, the growth in Indian consumption is fuelled by multiple engines: (a) the rise of the erstwhile backward states in northern India that have expanded at a five-year CAGR of 10%, (b) the rise of the young consumer with his/her higher propensity to spend, and (c) the rise of double-income families across all segments of Indian society. There are also several technical and valuation-based grounds for believing that the Indian market could be entering a full-fledged bull run. Interestingly, in all of these stake purchases, the interested strategic buyer has offered a price at least 20% above the prevailing market price.

While it could be argued that this premium is being offered by the strategic buyers because they know something that we don't, the even more interesting point is that even at these premium valuations, a number of investors are not willing to sell their shares to the strategic buyer. This brings us to the compelling logic against delisting. Firstly, there are a number of institutional investors who will simply not part with their shares in high-quality franchise like GSK Consumer, United Spirits and HUL unless they are offered much higher premia. It is hard to see the MNCs being willing to pay such high valuations to buy a further 10-20% stake of these listed entities.

More important, being a listed company confers public relations and branding benefits. As prominent listed entities, companies such as Jet Airways and GSK Consumer get "free" media coverage whenever they publish their quarterly results. This sort of elevated public profile is actually hard to get for an unlisted MNC company such as, say, Cargill (which also has substantial operations in the agricultural sector in India). In addition, it helps MNCs get local currency for capital expenditure as and when required.

The Indian management can also be incentivised through Esops — this is necessary as it is they who provide the growth in both sales and earnings for the MNCs. Public scrutiny provides the best basis for valuation. India-dedicated valuation of an MNC is much higher than the parent company in the West. In fact, it could contribute significantly to the parent company's market cap.

Tax authorities in India are also beginning to examine the books of delisted companies on expenses being incurred to avoid paying taxes in India. For example, amounts spent on advertising, technical know-how payments, royalties that are being expensed out to reduce profits in India. Scrutiny by the markets and Indian shareholders will provide better defence and better PR. An MNC that doesn't delist will ultimately provide better valuations to domestic and global shareholders.

(The writer, former CEO of Britannia Industries, is a business and marketing consultant)